OCEANLINK LTD. v. THE RUNG RA DO (OWNERS OF THE SHIP)

1993, No. AJ273

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

ADMIRALTY JURISDICTION

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Admiralty Action in rem against the ship or vessel "RUNG RA DO"

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J U D G M E N T

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1. This is a notice of motion by which the Defendants seek to set aside service of the writ, and consequential relief, on the ground of lack of jurisdiction.

2. The Plaintiff time-chartered its vessel "Yick Hing" to the Government of the Democratic People's Republic of Korea (DPRK). Arising out of that charter, the Plaintiff has a claim for freight against DPRK. As security for that claim, the Plaintiff sought and obtained the arrest of the RUNG RA DO (the vessel) in Hong Kong.

3. The issue between the parties arises out of section 12B of the Supreme Court Ordinance which provides for bringing an action in rem. Sub-section (4) reads :

"(4) In the case of any such claim as is mentioned in section 12A(2)(e) to (q), where -

(a) the claim arises in connection with a ship; and

(b) the person who would be liable on the claim in an action in personam ("the relevant person") was, when the cause of action arose, the owner or charterer of, or in possession or in control of, the ship,

an action in rem may (whether or note the claim gives rise to a maritime lien on that ship) be brought in the High Court against -

(i) that ship, if at the time when the action is brought the relevant person is either the beneficial owner of that ship as respects all the shares in it or the charterer of it under a charter by demise; or

(ii) any other ship of which, at the time when the action is brought, the relevant person is the beneficial owner as respects all the shares in it."

4. It is not in dispute that a claim arises under section 12A(2)(h) in relation to the charter of the Yick Hing and that DPRK is the relevant person. The dispute is whether DPRK as relevant person was also the beneficial owner of the vessel when this action was brought.

5. Mr. Brooks of the Plaintiff's solicitors filed an affidavit in support of the warrant of arrest. The affidavit relied on three broad grounds to persuade the court as to beneficial ownership. First, Mr. Brooks referred to a telephone conversation between a trainee solicitor from his firm, Mr. Sum Loong, and the vessel's Hong Kong agents in which Mr. Sum was told that the vessel was owed by DPRK.

6. Second, Mr. Brooks deposed that until August 1992 Lloyd's Register of Ships showed DPRK as owner of the vessel. Details of ownership then changed to Korean Rungrado Shipping Company (KRRD) of Pyongyang, North Korea. However, Mr. Brooks believed that DPRK was transferring vessels out of its name to avoid arrest. He said that Lloyd's List of Shipowners 92/93 showed 34 vessels under its ownership. The list for 93/94, however, showed only two ships under its ownership. Lloyd's Maritime Information Services Limited on 5th October 1993 found the registered owners of the vessel to be KRRD "care of Government of the People's Republic of Korea". Mr. Brooks said that the rubric "care of" usually indicates that the care of party is either beneficial owner or registered manager. No registered manager being shown, DPRK was believed to be beneficial owner.

7. Third, Mr. Brooks said that under North Korean law all property is beneficially owned by the state.

8. The vessel was arrested on 6th October 1993. On 8th October, the Plaintiff received direct a fax letter from Mr. O Song II, Commercial Counsellor of the Korean Embassy in Austria. It was this body represented by Mr. O that was charterer of Yick Hing. It is not in dispute that DPRK was charterer. That letter said "we shall pay" freight in relation to Yick Hing and asked the Plaintiff to seek release of the vessel. Mr. O sent a further letter to the Plaintiff on the same day, copied to KRRD. In that letter, Mr. O said "we have effected payment" and "we request" release of the vessel. On 11th October, Mr. Brooks received a telephone call from Mr. O asking for release of the vessel because DPRK had paid.

9. On the same day, Mr. Brooks wrote to solicitors representing the Defendants to the effect that representatives of DPRK, the owners, were seeking release of the vessel. The solicitors replied on 12th October that their instructions came from the agents of KRRD and those instructions were that KRRD and not DPRK was beneficial owner. Just to further muddy the waters, Mr. O wrote again to Mr. Brooks on 12th October saying "we had effected payment" and asking again to release the vessel.

10. On 23rd October, the Defendants filed their Notice of Motion supported by an affidavit of Professor So Chang Sop, a doctor of law and section chief in the Research Centre of Law, Academy of Social Science, Pyongyang. Professor So gave it as his expert opinion that under North Korean law, KRRD is beneficial owner of the vessel. Battle was then joined between the parties by way of expert's opinion as to whether anyone other than the state/DPRK can own property in North Korea, and if so, whether KRRD was capable of owning and indeed did beneficially own the vessel.

11. It is not in dispute that the court may look behind the registered owner of a vessel to see whether that owner is beneficial owner or merely a nominal owner, the beneficial owner being another. Authority for this proposition may been found in I Congreso Del Partido (1978) 1 Q.B. 501 and The Aventicum (1978) 1 Lloyd's Rep. 184.

12. It was also not in dispute that generally it is incumbent upon a plaintiff to show that a court's jurisdiction exists when that jurisdiction is challenged. See The Rolita (1989) 1 H.K.L.R. 394. For the Plaintiff, however, Mr. Chua submitted that a defendant alleging a change of beneficial ownership has to establish that there has been an effective change. He referred to The Saudi Prince (1982) 2 Lloyd's Rep. 255 where the onus apparently fell on the defendant. In that case, however, the alleged change of ownership took place well after the cause the action arose and, at the time of arrest, the vessel was still shown in Lloyd's Register in the name of the original owner. That case, therefore, turned on its particular facts.

13. Mr. Chua said that there are facts particular to this case which warrant a similar approach. First, he said admissions of ownership by DPRK have been made. Those admissions were by Mr. O, and by the vessel's agents to the trainee solicitor, Mr. Sum.

14. In my view, Mr. O's letters and telephone call to Mr. Brooks do not amount to admissions. DPRK owed the Plaintiff for freight under the Yick Hing charterparty, hence "we have paid". DPRK would also plainly have an interest in the release of one of its country's vessels.

15. Nor does Mr. Sum's conversation with the agents disclose an admission. In his affidavit of 6th October 1993, Mr. Sum said:

"2. In the fore noon of 4th October 1993, I had a telephone conversation with Mr. Chien of Chuen Hing Agency, the Hong Kong agents of the vessel. I informed Mr. Chien that I was a cargo supplier wanting to hire one of their vessels to ship some cargo to Korea. I posed as a cargo supplier so as not to alert Mr. Chien to the Plaintiffs interest in the vessel and her possible arrest. Mr. Chien advised that they had a vessel called "RUNG RA DO" available which was presently loading/collecting cargo at the port of Hong Kong. She was scheduled to depart Hong Kong and leave to Nampo, North Korea on the 9th October 1993. I specifically asked Mr. Chien whether she would also go to South Korea but he replied that she would not as she was owned by the North Korean Government.

3. I therefore believe that the vessel "RUNG RA DO" is beneficially owned by the Government of the People's Republic of Korea, Pyongyang, notwithstanding her registered owners as stated is Lloyds Register of Ships 1993/94 are Korea Rungrado Shipping Co."

16. I doubt whether what Mr. Sum was allegedly told is a sufficient basis for asserting that there was an admission of beneficial ownership. The matter, however, went further. A director of the agents, Kai Chuen Ching filed an affirmation on 23rd November. He said that there was no such employee as Chien and even if anyone in the agents said DPRK was beneficial owner of the vessel, that person was wrong.

17. Mr. Sum filed a further affidavit in which he deposed that he telephoned the agents again on 25th November and spoke to the same person as before, that person still calling himself Chien. That person remembered the earlier call.

18. On 5th July 1994, Michael Ka Sum Ching, a director of the agents' holding company, filed an affidavit. He disclosed that Mr. Sum spoke to him but that the substance of the first call was that the caller asked if the vessel could go to South Korea and Mr. Ka said not. Mr. Ka explained that he believed any North Korean flag vessel would not be allowed to sail to South Korea. He denied saying the vessel was owned by DPRK.

19. I accept that Mr. Ka's affirmation comes late in the day without the benefit of an attendance note as had Mr. Sum. Without resolving the disputed factual issue, Mr. Ka's explanation comes nowhere near being discounted. His account of what occurred seems highly plausible given that the caller, Mr. Sum, did not wish to alert the agents to the Plaintiff's interest in the vessel and her possible arrest.

20. Accordingly, I do not find that there were any admissions of beneficial ownership by or on behalf of DPRK. There is no need, therefore, for the Defendants to provide any convincing and credible explanation for the withdrawal of such admissions, assuming such an explanation is anyway required. For the proposition that an explanation is required in the circumstances, Mr. Chua relied on Tse Yuk Tin v. Chee Cheung Hing (1984) HKLR 391, a decision of the late Mr. Justice Hunter. It is clear, however, that that decision is confined to an admission contained in a pleading where there has been a considered decision to make the admission. Here, there is no pleading, still less any considered decision. The letters and telephone conversations, therefore, are simply pieces of evidence for me to give such weight as I think appropriate.

21. The second matter peculiar to this case, according to Mr. Chua, is the fact that, although it is now said KRRD purchased the vessel in 1981 and has beneficially owned it since then, for 11 years from 1981 to 1992, the vessel was registered in the name of DPRK. At paragraph 4 of his affidavit, Mr. Ka said:

"With regard to the reference to entries in Lloyds' Register of Ships 1992/93 referred to in paragraph 17(b) of Mr. Brooks' Affidavit, I have been aware that notwithstanding the fact that the owners of the Rung Ra Do have for over 11 years been Korea Rungrado Shipping Company, Lloyds' Register has shown the owners to be the Government of North Korea. This is not the first time that the Rung Ra Do has been arrested in Hong Kong. I recall at least four previous occasions in the past few years where Plaintiffs with claims against other North Korean registered vessels have arrested the Rung Ra Do on the assumption that all North Korean vessels are owned by the North Korean Government. In all of the previous occasions, the Plaintiffs have agreed to release the Rung Ra Do before any application has come to court after being provided with evidence that the vessel is owned by Korea Rungrado Shipping Company and not the Government of the Democratic People's Republic of Korea. Chuen Hing has on a number of occasions recommended to Korea Rungrado Shipping Company that they take steps to correct the error in the previous editions of Lloyds' Register. However, I believe that due to a lack of understanding on the part of Korea Rungrado Shipping Company of the significance of entries contained in Lloyds' Register and furthermore their lack of knowledge and understanding of Admiralty Law in foreign jurisdictions, our recommendations were not immediately acted upon."

22. Mr. Chua said Mr. Ka's explanation is unconvincing and improbable. He said there is no explanation of why the vessel was registered in the name of DPRK since 1981; no explanation of why action was not taken earlier given 4 previous arrests; no explanation of how often and to whom or by whom the recommendations were made; and above all, there are no grounds for Mr. Ka's belief.

23. I take Mr. Ka's belief to be reasonable based upon the lack of response by KRRD. His explanation, however, is thin and is compounded, as Mr. Chua pointed out in relation to this and other topics, by a complete absence of any evidence from an officer of KRRD itself. Notwithstanding these facts, in my judgment the burden remains on the Plaintiff to show that DPRK was beneficial owner of the vessel on the date when the writ was issued.

24. So I turn to North Korean law. This involves consideration of the Constitution, Chapter II, The Economy; and of the Civil Law, Part II, Regulations Relating To Ownership. The relevant articles of the Constitution are:

"	THE ECONOMY

Article 19

The Democratic People's Republic of Korea relies on the socialist production relations and on the foundation of an independent national economy.

Article 20

In the Democratic People's Republic of Korea the means of production are owned only by the State and co-operative organizations.

Article 21

The property of the State belongs to the entire people.

There is no limit to the property which the State can own.

All natural resources of the country, major factories and enterprises, ports and harbours, banks, transport and communications establishments are owned solely by the State.

The State shall protect and develop on a preferential basis State property playing the leading role in the economic development of the country.

Article 22

The property of co-operative organizations is collectively owned by the working people involved in the co-operative economy.

Land, draught animals, farm implements, fishing boats, buildings, as well as small and medium- size factories and enterprises may be owned by co- operative organizations.

The State shall protect the property of co- operative organizations.

Article 24

Private property is property owned and consumed by individual working people. .....

Article 36

In the Democratic People's Republic of Korea, foreign trade is conducted by the State or under its supervision."

The relevant chapters and articles of the Civil Law are:

"	Chapter 1. General Regulations

Article 37

The ownership of property in the Democratic People's Republic of Korea falls into the categories of state ownership, co-operative ownership and private ownership.

Article 38

Ownership is established on the basis of the law, a contract or another form of agreement.

Ownership is established when it is provided for by law should it be based on law, and when a contract is concluded and objects are handed over in case it is based on contract.

Article 39

A person in a position of ownership may possess, use and dispose of the property in his or her possession within the limits provided for by law.

The disposal of property may be conducted only by a person in a proper position of ownership.

Article 40

A person in a position of ownership may demand the return of his or her property in cases where it is held unlawfully by another.

Article 41

A person in a position of ownership may request a person tendering the exercise of his or her ownership to desist from the act.

Chapter 2. State Ownership

Article 44

The property of the state belongs to the entire population.

State property consists of nationalized property, property acquired by state investment, products of state-owned enterprises, property bought by state institutes and enterprises, property transferred to state institutes and enterprises by state decision, property transferred to the state by co-operative organizations and citizens and property submitted to the state treasury.

Article 45

The state may own property without limit.

The following properties may be owned only by the state.

1. All the natural resources of the country including underground, forestry and marine resources.

2. Major factories and enterprises in different branches of the national economy including heavy and light industry, fisheries and forestry, enterprises serving agriculture such as farm machine stations and irrigation control offices, purchasing and food administration bodies, city administration offices, and major trading, printing and publishing companies.

3. Ports, banks, transport and communications facilities and broadcasting stations.

4. Education institutes at various levels and major cultural and health facilities.

Article 46

State property is held by the state on behalf of the entire population.

The state may hold, use and dispose of state- owned property without limit in the interests of the prosperity and development of the country and of the promotion of the people's well-being.

Article 47

The state exercises ownership directly or through individual state institutes and enterprises.

Those state institutes and enterprises with the right to administer and man-age state-owned property may hold, use and dispose of the property in their name under the guidance of the state.

Article 48

In cases where the property of a state institute or enterprise is supplied or sold to a co-operative organization or citizen, state ownership shall be transferred to the co-operative organization or citizen. But in cases where the property of a state institute or enterprise is supplied or sold to another state institute or enterprise, only the right of management is transferred.

Article 49

In the case of fixed assets such as tractors, rice-transplanting machines, harvesters and other modern farm machines supplied to co-operative farms by agricultural facilities, threshing grounds, pens for domestic animals and warehouses built for co-operative farms at state expenses, the state continues to hold ownership of them while transferring the right to use them to the co-operative farm concerned.

Co-operative farms may use the fixed assets provided by the state to help them as their own in accordance with their mission.

Chapter 3. Co-operative Ownership

Article 53

The property of co-operative organizations is collectively owned by the working people belonging to the organization.

Co-operative property consists of property contributed by the members of the co-operative organization, property which accrues from the co- operative organization's investment, products of the co- operative economy, the assets acquired by the co- operative organization and property whose ownership the state has handed over to the co-operative organization.

Article 54

A co-operative organization may have land, draught cattle, farm implements, fishing boats, buildings, small and medium-size factories and enterprises, cultural and health facilities and other objects it needs to operate.

Article 55

The holder of a co-operative ownership is the co-operative organization.

A co-operative organization may hold, use and dispose of its property in accordance with democratic principles, and as its members desire. Land may be disposed of only as provided for in the law.

Article 56

In cases where the products of a co-operative organization are supplied or sold to a state organization or enterprise, to another co-operative organization or to a citizen, their ownership shall be transferred.

Chapter 4. Individual Ownership

Article 59

A citizen may own a house, household and cultural goods needed by his or her family and other necessaries of life, cars and other items."

25. The Constitution and the Civil Law provide for three kinds of ownership: by the state or DPRK; by co-operative organization; and by individual. It is plain and not in dispute that no question of individual or private ownership of the vessel arises. Therefore, if the vessel was not owned by the state, it could only be owned by a co-operative organization.

26. Professor So, relying on a certificate dated 23rd October 1993 from the Central Court of DPRK, stated KRRD to be a co-operative organization. That seems to have been accepted on all sides. I am bound to say, however, that I have serious doubt as to whether KRRD is truly a co- operative organization. Articles 22 of Constitution and 54 of the Civil Law strongly suggest to me that co-operative organizations are restricted to modest enterprises set up on a neighbourhood basis, whose activities are essentially local and domestic. Nothing in the Articles seems to warrant foreign or overseas activity far less ownership of ocean going vessels in order to promote such activity. Article 49 of the Civil Law, which provides for use only of assets such as tractors and other agricultural equipment supplied to co-operatives, serves only to reinforce my view.

27. Professor So would appear to avoid this difficulty by asserting that "fishing boat" in Article 22 of the Constitution is only an example and that small and medium sized vessels may also be subject of co-operative ownership. He asserts "transport" in Article 21 refers to property of organs such as the Transport Commission or Ministry of Marine Transport which are ministries of government and constitute the major transportational infra- structure. Consequently, he says, other means of transport, such as vessels, operated in the business activities of co-operative organizations may be owned by those co-operative organizations.

28. Professor So goes on to exhibit a certificate from Korea Daesong Bank dated 9th November 1993 to the effect that KRRD paid Won 4.4m to another shipping company for purchase of the vessel in 1981. He exhibits a confirmatory certificate dated 10th November 1993 from that shipping company. And he exhibits copies of the registration of other vessels in DPRK registry showing the owners to be shipping companies (presumably co-operative organizations). A similar document has been produced for the vessel showing the owner as KRRD.

29. Finally, in relation to Article 36 of the Constitution, Professor So asserts that it enshrines the state's right to unify policy for foreign trade activities. He concludes by saying that the vessel was beneficially and legally owned by KRRD.

30. Dr. Woong Shik Shin is senior partner of a legal firm in Seoul, South Korea, who specialises in international transactions and who has written on Korean law. In his affidavit, he reviews the various Articles. He does not, however, analyse them in any depth. In relation to Article 21 of the Constitution, he points out that the provision that the state owns transport establishments does not mean that the state owns each or all of the means of transportation, such as vessels. Finally, after referring to the certificates I have already mentioned, Dr. Woong is of the opinion that KRRD is a co- operative organization and owner of the vessel.

31. Professor Chin Kim is Professor of Law at California Western School of Law, San Diego. He has written widely on North Korean law. He made a more detailed and more closely reasoned affidavit than either of the Defendants' two experts. He said it is important to examine two matters, namely the nature of North Korean political and legal ideology and secondly, the published legal framework and its application. He said the North Korean approach to ownership is far removed from the ideas of any other nation. North Korea is a pure Marxist-Leninist Communist state. The ideology which determines its national life can be summed up in the word 'chuche' which requires that the tenets of Marxist-Leninist ideology, in particular the absence of true ownership independent of the state, be adhered to. The true nature of ownership in North Korea is beneficial ownership and control by the state. Apart from chuche, the paramount authority is the Constitution which takes precedence over all other legal measures.

32. Professor Chin said that Article 21 of the Constitution makes it clear that transport establishments "are owned solely by the state". He accepts, as Professor So said, that Government Ministries or departments are within the ambit of Article 21. He points out, however, that Article 21 deals with ownership of all transport establishments or enterprises. A co-operative organization providing transport or transport facilities must, therefore, under the Constitution be state-owned and the equipment be beneficially owned by the state.

33. Professor Chin said that Article 21 deals with the means of production which are crucial to the North Korean economy. Sea transport, the major means of conducting international trade, is extremely important to the extent that Article 21 refers both to ports, which must be state-owned, and the transport establishments or enterprises using the ports which also must be state-owned. He says it is inconceivable that the state would permit ultimate ownership of the means of international trade and transport to be anything other than state-owned and controlled. Therefore, even if KRRD is nominal owner of the vessel, the Constitution determines its beneficial ownership by the state. He draws attention to Article 36 and rejects Professor So's interpretation that it simply enshrines the state's right to unify policy for foreign trade but does not affect ownership of property, such as vessels registered in the name co-operative organizations.

34. In relation to Article 22 of the Constitution, Professor Chin says it can be seen that co-operative organizations are not permitted to own major means of production and trade, nor areas of high importance to the economic development. He says there is nothing in the types of property, set out in that Article, which a co-operative may own which are of the nature of transportation in a business sense. I note that that view is very much in accordance with the difficulty which I have already expressed.

35. Professor Chin emphasised that under the Constitution all property is owned by the state unless otherwise specifically permitted, and that transport and transport establishments must be in the sole ownership of the state and cannot be independent of it. He recognised, however, that the state may own a means of transport via a co-operative organization.

36. Professor Chin also pointed out that Article 54 of the Civil Law is similar to Article 22 of the Constitution, but goes on to refer to "other things necessary for its management activities". He asserts that "management activities" is intended to mean items necessary for managing the production enterprise and does not encompass transportation facilities used in international trade. He is of the firm opinion that the vessel is beneficially owned by DPRK.

37. Professor Chong Ko Choi holds a chair at Seoul National University College of Law. He teaches the history of legal thoughts and has a particular interest in the law of North Korea. He has written extensively on North Korean law.

38. He goes rather farther than Professor Chin. He says that true proprietorship does not seem to exist in North Korea. Rather, the state grants via the law a right to use, which it terms ownership. In effect, an organization or person receives a licence to use something, but obtains no proprietary interest in the sense in which the common law understands it. Everything in North Korea exists by virtue of the benevolence of the leader, the late Kim II Sung. Professor Chong also comments that he does not consider the vessel to be a fishing boat or other similar vessel as provided under Article 22.

39. Professor So replied to the opinions of the Plaintiff's experts. He said that Professor Chong "ignores the manifestation of consideration for the transfer of property rights as evidenced by payment when ownership changes hands". By this, I understand him to mean, by the examples which he gives, that things can be bought and sold and property rights transferred in the manner in which we would understand it.

40. Professor So goes on to say that Article 36 of the Constitution allows foreign trade to be performed by the state alone or by other enterprises subject to the control of the state. He says this is not unusual even under capitalist systems where trade is controlled by export quotas, Customs and Excise Regulations and similar matters. In relation to Article 21, Professor So points out that it refers to "major factories and enterprises" meaning both major factories and major enterprises. These, he says, are the large scale and key factories and enterprises. He then goes on to say that transport establishment means the property of major transport organs such as those referred to in his previous affidavit.

41. Finally, Professor Chin replied. I do not think, however, that this affidavit added anything to the expositions which have already been set out.

42. I do not have any hesitation in saying that I accept Professor Chin's interpretation of the Constitution and Civil Law as read in conjunction with the ideology which he says prevails in North Korea. His main affidavit was, as I said, more analytical and carefully considered than the affidavits of any of the other experts. In my judgment, his opinion stands on its own but if support were required, then I think some is to be found from the affidavit of Mr. Yoon Sei Wha, the managing director of the Plaintiff. Mr. Yoon has scrutinised a number of shipping registers including the Lloyd's Registers and the Fairplay Shipping Directory 1993. These publications show vessels being listed either directly under the DPRK or under the names of companies which companies are plainly either managers or operators only. North Korea plainly values its international trade. It would be suprising if it has not by now grasped the importance attached to true or beneficial ownership of a vessel. Yet it has taken no real steps to try and ensure that the various international publications, upon which people dealing with shipping matters rely, truly reflect where ownership lies, if it lies other than in the hands of the state itself.

43. I have no doubt and I find that the Plaintiff has proved that the vessel is beneficially owned by DPRK. The Plaintiff has satisfied me through their experts that a co-operative organization cannot own an international trading vessel although it may operate or manage the vessel on behalf of the Government. I am exceedingly doubtful whether KRRD is, in fact, a co-operative organization. Rather I would consider that it is a state enterprise, through which the state is exercising ownership pursuant to Article 47 of the Civil Law.

44. In coming to my conclusion, I have not overlooked that there is complete documentation of the purchase by KRRD of another vessel in 1992 by way of formal contract and bill of sale. That does not, however, assist. Plainly, KRRD could have purchased on behalf of DPRK with funds supplied by DPRK. Indeed, there is no evidence, as Mr. Chua has been alert to remind me, as to where the funds for this purchase came from. It is interesting to note that this vessel, Bu Hung, appears both in Fairplay Shipping Directory 1992/93 and Lloyd's Maritime Directory 1990 directly under the Government of North Korea.

45. In the circumstances, I dismiss the Defendants' Notice of Motion. I make an order nisi that the Plaintiff should have the costs in any event.